...Abstract This paper shall discuss the Gold Standard, the Bretton Woods System and the European Exchange Rate Mechanism with a view to analysing their respective advantages and disadvantages; along with the circumstances surrounding their emergence and failure. Through this lens the author intends to draw comparisons between the current EMU and the Gold Standard and any implications these similarities have Introduction A prerequisite to any discussion on this topic is an understanding of certain classical and neo-classical analytical frameworks. Therefore section one will briefly present and explain the logic of Hume’s Mechanism and the ‘Impossible Trinity.’ Section Two outlines a chronological history of various exchange rate mechanisms along with their corresponding successes and failures. Section three draws parallels between the Gold Standard and the European Monetary Union and discusses the consequences of these similarities. Section One: Analytical Frameworks Hume’s Mechanism: This theory combines aspects of the purchasing power parity and interest rate parity conditions. It states that as the monetary base (M) increases domestic prices trend upwards. This induces a nation to import more goods than it exports, creating a current account deficit. This deficit gradually causes gold to leave the system, causing prices to revert back to their original levels- producing a balanced current account. This process in the goods markets is far slower than the complimentary...
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...Global Finance and Exchange Rate Roderick Duncan MGT 448 06/11/2013 Sue Caruthers Global Finance and Exchange Rate Global finance operations are financial processes, such as accounting, financial planning and analysis, investor relations, treasury, and strategic planning. Web Finance states, exchange rate is “Rate at which one currency may be converted into another. The exchange rate is used when simply converting one currency to another (such as for the purposes of travel to another country), or for engaging in speculation or trading in the foreign exchange market” (exchange rate, para.1). The purpose of this paper is to examine the exchange rate mechanism (Euro Currency Markets), explain how this mechanism is used in global financing operations, and to describe its significance in managing risks. The euro’s evolution began in 1946 when England’s Prime Minister Winston Churchill and other European leaders anticipated Europe to simulate the United States. This brought about the making of the 15- nation European Union that formed the euro. A&E (2013), states “On March 25, 1957, France, West Germany, Italy, the Netherlands, Belgium, and Luxembourg sign a treaty in Rome establishing the European Economic Community (EEC), also known as the Common Market. The EEC, which came into operation in January 1958, was a major step in Europe's movement toward economic and political union” (common Market founded, para. 1). The European Monetary Unit (EMU) was formed in...
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...The Euro is an individual currency that has theoretically been in operation in eleven countries that are members of the European Union. It was introduced in theory in January in the year 1999. The plans for arranging a single currency solidified on 1st January, 2002, when 12 EU member countries stopped using their own individual currencies and declared the Euro as their only currency. The EU has offered to let Britain hold a public vote on whether Britain should use the Euro as part of its economic involvement in the EU. Ever since the Euro has been introduced, it’s performance has been poor when it is compared with the values of the British Pound and the American Dollar. The Euro is a single currency arrangement that came into theoretical operation between 11 members of the European Union in January 1999. On January 1st 2002, 12 EU members got rid of their own currencies and introduced the Euro as their sole currency. If Britain joins the Euro, it will likely be in 2003. The government has offered the British public a referendum on Britain's entry into it though some ministers have clouded the issue as to whether Britain's entry (or not) will be a political or an economic decision. Jack Straw, Home Secretary, has stated that a decision will almost certainly be a political one whereas the Chancellor, Gordon Brown, has stated that the 'Five Tests' will determine whether we join the Euro - i.e., any decision will be an economic one. The Euro’s record since its introduction...
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...interpret the likely consequences of new policies in the area of international finance. This chapter describes how exchange rates are determined under four different mechanisms--free float, managed float, fixed-rate system, and target-zone system. Under the latter three systems, governments intervene in the currency markets in one form or another to affect the exchange rate. Key Points 1. Under the latter three systems, which involve varying degrees of central bank intervention, the real exchange rate is liable to change, with important implications for exchange risk management (as discussed in Chapters 9 through 11). 2. Regardless of the form of intervention, fixed rates don't remain fixed for long. Neither do floating rates. The basic reason that exchange rates don't stay fixed for long in either a fixed- or floating-rate system is that governments subordinate exchange rate considerations to domestic political considerations. 3. The gold standard is a specific type of fixed exchange rate system, one that required participating countries to maintain the value of their currencies in terms of gold. Calls for a new gold standard remind us of the fundamental lack of trust in fiat money due to the historical unwillingness of the monetary authorities to desist from tampering with the money supply. 4. Intervention to maintain a disequilibrium rate is usually either ineffective or injurious when pursued over lengthy periods of time. Seldom, if ever, have policy makers...
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...EMS The European Monetary System (EMS) was the forerunner of Economic and Monetary Union (EMU), which led to the establishment of the Euro. It was a way of creating an area of currency stability throughout the European Community by encouraging countries to co-ordinate their monetary policies. It used an Exchange Rate Mechanism (ERM) to create stable exchange rates in order to improve trade between EU member states and thus help the development of the single market. Stable money had been a key part of international economic calculations since World War II. However, by the 1980s, opinion about it was much more divided. As a result, not all countries took part in the EMS straight away, and there were deeper splits in the years to come over the role of the EU in setting monetary policy as the EMS was replaced with the Euro. History The EMS was launched in 1979 to help lead to the ultimate goal of EMU that had been set out in the Werner Report (1970). The EMS came about because of the high global inflation and economic stagnation that characterized much of the 1970s. Contributing greatly to these problems was the sorry financial predicament of the United States during this decade. The dollar, which served as a peg for European currencies, was plagued by a ballooning American deficit, the oil crisis, a rapid rise in the demand for gold in world commodity markets, and unemployment and "stagflation" at home. The currency exchange rates of European Community (EC) members fluctuated...
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...1.The begin of EMU, EMU convergence criteria. Purpose: The main purpose of European Monetary Union(EMU) is to establish a single European currency called the Euro to substitute for the currency of the member countries. At present, the member countries include Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Italy, Spain, and Portugal. Process: European monetary system came from the European Monetary Union.OEEC-Organization for European Economic Cooperation established The European Payments Union in 1950 ,which was replaced by European Monetary Agreement in 1958. Although it did not have concrete ideas of monetary integration, it started the process of European monetary union. December 1969, the EC formally proposed the establishment of the European Economic and Monetary Union and designed the schedule, But the first 10 years of progress is not smooth. July 1978, in order to fight against the dependence on the U.S. dollar, they established the European Monetary System formally. In March 1979, European communities began to execute the construction plan of the European Monetary system. In December 1991, the 12 member countries of the European communities signed a treaty named Economic and monetary union treaty, which regulate that the EMU should be established no later than January 1st, 1999. At that time, a unified currency, a unified central bank and a unified monetary policy will be achieved. After the Maastricht Treaty was approved by...
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...Monetary System Question in the test bank follow the order of the chapter outline: Evolution of the International Monetary System The Current Exchange Rate Arrangements European Monetary System The Euro and the European Monetary Union The Mexican Peso Crisis The Asian Currency Crisis The Argentine Peso Crisis Fixed versus Flexible Exchange Rate Regimes Evolution of the International Monetary System 1. The international monetary system can be defined as the institutional framework within which a) international payments are made. b) movement of capital is accommodated. c) exchange rates among currencies are determined. d) all of the above Answer: d) 2. Corporations today are operating in an environment in which exchange rate changes may adversely affect their competitive positions in the marketplace. This situation, in turn, makes it necessary for many firms to a) carefully manage their exchange risk exposure. b) carefully measure their exchange risk exposure. c) both a) and b) Answer: c) 3. The international monetary system went through several distinct stages of evolution. These stages are summarized, in alphabetic order, as follows: (i)- Bimetallism (ii)- Bretton Woods system (iii)- Classical gold standard (iv)- Flexible exchange rate regime (v)- Interwar period The chronological order that they actually occurred is: a) (iii), (i), (iv), (ii), and (v) ...
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...order to analyse the multifaceted character of the European sovereign debt crisis, this essay focuses on its systemic causes. Contrary to the argument of popular Northern European politicians and journalists that blame the inability of Southern European states to manage deficit spending, the Eurozone crisis is firstly determined by imbalances in the European Monetary Union, and secondly by imbalances in the global political economy. This paper argues that the vast amount of sovereign debt is therefore not the result of weak Southern European nations, but of inherent structural illnesses that ultimately led to the current crisis. This essay is divided into two sections. The first section examines the problems of the design of the European Monetary Union. In regard to the theory of an ‘Optimum Currency Area’ by Robert Mundell, it analyses the extent to which the EMU has failed to meet the criteria of optimised efficiency. In the absence of an adjustment mechanism for unequal development in Euro member states, the dominance of Germany as leading export nation created severe inequalities. The second section then focuses on the role of the global political economy and imbalances that were created in the ‘era of financialisation’ following the demise of Bretton Woods. The shift to neoliberalism and consequently the liberalisation of finance have led to an increase in speculation with financial assets. The ‘Global Surplus Recycling Mechanism’ – the recycling of surpluses from successful export...
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...------------------------------------------------- Policy Paper, spring 2012 ------------------------------------------------- Is a Greek exit from the European Union inevitable? 0909512 Table of Contents Pg. List of Illustrations 3 Executive Summary 4 1.0 Introduction 5 2.0 The Economic Cost and Benefit for State Membership of the EMU 5 2.1 Benefits of EMU Membership & Mechanisms 5 2.2 Costs of EMU Membership 7 3.0 Contextual Factors: The Profusion of Dept 10 3.1 The Eurozone Crisis 10 3.3 Greece- The Forefront of the Euro Area Crisis 13 4.0 Alternate Policies and the Effective Consequences 15 4.1 Predicament 15 4.2 Abetting Dependent on Austerity 16 4.3 Creditor-Led Default 17 4.4 Debtor-led Default and Greek Haircuts 19 4.5 Greek Exit 20 5.0 Recommendation 21 Appendices: Appendix 1: Preferential liberalization References List of Illustrations Pg. Illustration 1: The cost of EMU- Diminishing Domestic Flexibility to Asymmetric Macro Shocks 7 Illustration 2: Cost and benefit of Monetary Unions 9 Illustration 3: Evolution of Nominal Unit Labor Costs in the Eurozone Pre to the US Credit Crunch 9 Illustration 4: Current Account Balances in Percentage GDP 10 Illustration 5: Core Bank Exposure to the Weaker Eurozone Member States 12 Illustration 5: Holders of Greek Government Bonds and Dept (in...
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...The Euro Debt Crisis: Greece’s and its Next Move Matthew Schrock Financial Markets & Institutions Dr. Victoria Geyfman December 6, 2012 “The Euro Crisis and Greece’s Next Move” The Euro currency, during its original preparation and issuance, had been seen with optimism. It was presumed that the new union of European markets would create a new economic power within Europe, matching it with other economic leaders such as the U.S. and other powers. At this point in history, the Euro seems to be on the brink of despair. The European Monetary Union had determined and established the prerequisite diplomacy and policy making to assure a newly created stable and integrated economy of Europe. The reality of this new currency and monetary union is far from the original optimistic outlook. Policy set forth in the original agreements and conditions of the European Monetary Union that had been established before its adoption had been treated without regard by countries. This disregard started with deceit from Greece but quickly became almost the status quo. Greece is known as the catalyst and a scapegoat within the views of the Euro debt crisis. Greece is on the brink of insolvency and others are following. Options are available in this time of uncertainty, whether they are conventional or not, that could result in Greece remaining within the Euro and accepting austerity or altering their status and participation within the monetary union. The decision that will be...
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...negatives of policy coordination. Here this video is supported by two cases such as Strict fiscal and monetary policies of US in 1985 and the other is UK joining in European monetary system [1] Managed currency The majority of major world currencies are managed at least to some degree. This is due to the purchase and sale of these currencies by the central banks of different countries. They do this in order to stabilize the international money markets and affects their own monetary policies. Why managing currencies? a. Reduce currency fluctuations If the value of currencies fluctuate significantly this can cause problems for firms engaged in trade. * For example if a firm is exporting to the US, a rapid appreciation in sterling would make its exports uncompetitive and therefore may go out of business. * If a firm relied on imported raw materials a devaluation would increase the costs of imports and would reduce profitability. b. Stability encourages investment. The uncertainty of exchange rate fluctuations can reduce the incentive for firms to invest in export capacity. Some Japanese firms have said that the UK’s reluctance to join the Euro and provide a stable exchange rates make the UK a less desirable place to invest. c. Keep inflation Low Governments who allow their exchange rate to devalue may cause inflationary pressures to occur. This is because AD increases, import prices increase and firms have less incentive to cut costs. [2] ...
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...Critically analyse the current state of the European Monetary Union. The European Monetary Union or the European Economic and Monetary Union (EMU) is the successor to its predecessor: The European Monetary System, and attempts to deliver an economic system which is unified and cohesive for all the members of the European Union. Perhaps the most notable and drastic change implemented under this systematic collection of policies is the adoption of the Euro currency over the national currencies of the member states out of which only the United Kingdom and Denmark have chosen to not follow in the footsteps of their fellow member countries. The European Monetary Union is essentially a complex but involved coordination of a common monetary policy amongst all members of the European union, accommodating fiscal and economic policies and most notably the currency common to all members, the Euro. This decision to form an exclusive and unified front was undertaken in December, of 1991, in the city of Maastricht in Netherlands and was later more firmly integrated in the Maastricht Treaty on the European Union. It has been designed as a tool to implement the full economic integration of the European Union and to complete the integration as one system, which started in 1957. Through this integration, the European Union hopes to gain the benefits of having a larger sized failsafe net, internal and cohesive efficiency combined together with the European Monetary Union, it would provide a robust...
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...Summary: International Financial Markets (master blok 1) Book: Financial Markets and Institutions (a European perspective) – Haan et al. Author: Kim Cornelissen Chapter 1: Functions of the Financial System 1.1. Functions of a financial system The financial system Figure 1.1; page 5 – Working of the financial system Financial system: includes all financial intermediaries and financial markets, and their relations with respect to the flow of funds to and from households, governments, business firms, and foreigners, as well as the financial infrastructure. Main task is to channel funds from sectors that have a surplus to sectors that have a shortage of funds. Financial infrastructure: the set of institutions that enables effective operation of financial intermediaries and financial markets, including such elements as payment systems, credit information bureaus and collateral registries. * Direct finance: occurs if a sector in need of funds borrows from another sector via a financial market. Financial market: is a market where participants issue and trade securities. * Indirect finance: a financial intermediary obtains funds from savers and uses these savings to make loans to a sector in need of finance. financial intermediaries: coalitions of agents that combine to provide financial services, such as banks, insurance companies, finance companies, mutual funds, pension funds etc. Bank-based system: indirect finance is then the main route for moving funds...
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...The Crisis Scenario around the British Pound in 1992 By the time the United Kingdom joined the European Exchange Rate Mechanism (ERM) in October 1990, it was already living a severe economic recession. A drop in industrial productivity and high levels of unemployment struck the nation after the economic growth of the 1980’s (Table 1 and 2). Table 1 – Unemployment Rate in UK in % Source: Office for National Statistics (UK) Table 2 – Industrial Production in UK: Percentage change year-over-year Source: www.tradingeconomics.com During the prosper economic period of the 1980’s there was strong private investment on household, meaning that the mortgage credit rose significantly. In the beginning of the 1990’s the level of private debt was unbearable (Graph 1). Graph 1 - Debt to income ratio Source: Bank of England High rates of unemployment, high private debt and lack of macroeconomic surveillance tools have been pointed out as the main reasons for the economic recession of the early 1990’s. A sharper control over macroeconomic policies as well as an effective control of inflation and the defense of competitiveness of the sterling within Europe was some of the goals the British government aimed at by joining the ERM. A central exchange rate for each participating currency was established against the ECU, the artificial unit of account that set the pillars for the Euro currency. In practice, the participating currencies where actually pegged to the German...
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...Chap1 Glossary (See related pages) | | | Central bank | The financial institution that manages the government's finances, controls the availability of money and credit in the economy, and serves as the bank to commercial banks. | | | | European Central Bank (ECB) | The central authority, located in Frankfurt, Germany, which oversees monetary policy in the common currency area. | | | | Federal Reserve System | The central bank responsible for monetary policy in the United States. | | | | Financial institutions | Firms, such as banks and insurance companies, that provide access to the financial markets, both to savers who wish to purchase financial instruments directly and to borrowers who want to issue them; also known as financial intermediaries. | | | | Financial instrument | The written legal obligation of one party to transfer something of value (usually money) to another party at some future date, under certain conditions. | | | | Financial market | The part of the financial system that allows people to buy and sell financial instruments quickly and cheaply. | | | | Financial system | The system that allows people to engage in economic transactions. It is composed of five parts: money, financial instruments, financial markets, financial institutions, and central banks. | | | | Information | A collection of facts. The basis for the third core principle of money and...
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